Labour will struggle to placate Britain’s angry graduates

FOR YEARS politicians have tinkered with England’s student-loan system—often in ways that make it more costly for graduates—with surprisingly little pushback. When, last November, Labour announced its own sly tweaks to repayment terms, it probably thought these would also go through without fuss. Instead the fiddling brought to the surface seething discontent, and calls for sweeping reforms.

Like a student unprepared for a seminar, Labour is struggling to respond. Its rivals say they will help graduates: the Tories have pledged to cut interest on student borrowings; the Greens have long said they would wipe out student debts. Last month the chancellor, Rachel Reeves, agreed that the loan system was “broken” but added that fixing it could not be “front of the queue”. On April 7th Labour said it would cap the interest applied to student loans for 12 months—a stopgap measure. Yet the longer Labour avoids a deeper rethink, the greater the risk that it will be forced into costlier changes down the line.

The ruckus centres on graduates with “Plan 2” loans who started university between 2012 (when the maximum tuition fee tripled to £9,000, or $12,000, a year) and 2022. Those who finished their courses in 2025 graduated with average debts of £53,000. Nowhere else do students borrow so much for a bachelor’s degree. Even in pricey America, average debt per borrower is only around $30,000. Fewer British families save for education and universities have higher fees than many in America.

Graduates on Plan 2 loans repay 9% of their earnings over a threshold, currently £29,385 a year. Any balance unpaid after 30 years is written off. Interest varies depending on each borrower’s income. The lowest-earning graduates see their debt increase with inflation (measured using the retail price index, or RPI, which overstates inflation); the best-paid ones are charged RPI plus 3%. Overpayments from more-successful graduates thus help fund write-offs for classmates who are expected never to repay what they borrowed (see chart).

Some graduates object to the size of their monthly payments. A graduate earning £35,000 pays £42 a month. One earning £70,000 coughs up more than £305. The first cohort of Plan 2 borrowers, now in their 30s, have begun landing jobs in media and politics that offer opportunities to make their hardships better known.

The louder grouse is that, because of interest charges, lots of graduates have watched their loan balances swell even though they have been repaying. In the wake of the pandemic inflation rose much higher than the architects of the loan system expected. A graduate with £50,000 of debt who makes only the minimum repayments would have to earn over £60,000 before their loan balance starts to shrink in cash terms. Well-paid grads resent that they are charged extra interest to help bail out peers who chose their courses poorly, or who have chosen not to work. General taxation would seem a fairer source for such subsidies, if they should exist at all.

A third criticism is that governments have repeatedly changed the repayment terms. The loose promise back in 2012 was that the repayment threshold would rise with average wages. But in 2022 Boris Johnson’s government froze it for three years and changed the way it would be uprated in future, to a stingier method. Then came Labour’s tweaks: in November it announced a fresh three-year freeze. On both occasions, politicians also froze the earnings thresholds that determine what rate of interest graduates pay—increasing the share of those saddled with higher rates.

These fiddles have saved the government money but vastly increased how much graduates will fork out in total. The IFS, a think-tank, says that a student applying to university in early 2022 might have expected to borrow around £48,000 and to pay back around £40,000 of that (in today’s money) over their lifetime. But the retroactive changes mean they are now expected to pay back around £56,000.

Rethink Repayment, a lobby group, would like the interest rate on loans reduced, the repayment threshold increased and the repayment rate cut from 9% to 5%. But this would cost the government billions: £12bn over the long run for the 2022 cohort alone, according to Kate Ogden at the IFS, and there are ten other cohorts of Plan 2 borrowers.

How, then, should the government respond? It might consider smaller relief, perhaps by pulling only one of the three levers in that plan. High real interest rates are by far the most unpopular part of the system. The catch for Labour is that cutting them would mostly benefit higher earners. Because low-earning graduates can expect to have a lot of their debt forgiven, they will never have to pay most of the interest being added to their balances.

The government might prefer to reduce graduates’ monthly payments—either by rescinding planned freezes of the repayment and interest thresholds, or by reducing the repayment rate. In theory that change could be made cost-neutral by extending the time students have to wait for forgiveness (albeit at the risk of causing a fresh controversy).

Bagging a bachelor’s still grants most people a life of fatter pay packets (even if the premium is not as big as it once was). It thus remains reasonable that graduates should pay a big share of the cost of their degrees. Yet society also benefits from minting well-trained workers—and in the past few years the balance of funding seems to have grown badly out of whack.

When the Plan 2 loan system was set up in 2012, it was accepted that taxpayers would end up covering about 40% of students’ fees and living costs. Fast forward a decade, and public money will contribute only 3% of the total costs of educating the cohort that started university in 2022, according to the IFS.

Support for England’s student-loan system was hard won. Tinkering in recent years has cost a lot of goodwill. Ignored, the current frustrations could well harden into big campaigns for debt forgiveness; that would not just be costly and arbitrary, but also deeply regressive. Much of England’s loan system is worth defending. Some recalibration would be smart.■